Despite advances in the treatment and management of ischemic heart disease, it still remains an important cause of death and disability in the United States and results in high patient care costs. This study utilizes micro-cost data from the Health Care Financing Administration's Medicare Heart Bypass Demonstration to analyze the differences in the procedures and services utilized by high-cost and low-cost coronary artery bypass graft surgery (CABG) patients. The effects of pre-operative risk factors and post-operative outcomes on direct variable costs associated with CABG will also be analyzed. Changes in costs over the period of the demonstration will be investigated to study the impact of bundling of payments on physician patient care management to identify the adoption of more efficient methods. The use of micro-cost data allow for detailed univariate analysis to be performed on costs within departments. a multi- equation model developed from a thorough theoretical framework will also be utilized. The results obtained will advance knowledge of the costs associated with CABG in several ways: provide details of costs associated with CABG by analyzing procedures and services within each department, demonstrate the effects of pre-and post- operative factors on costs, and identify efficient cost-saving techniques that can be adopted by hospitals performing CABG.